The stock market recorded declines ranging from 2¬-3 per cent in Norway – buoyed by strong oil prices – to more than 10 per cent¬ in Denmark. The S&P 500 and the MSCI World Index both fell by approximately 5 per cent.
Don't cry yet. The S&P 500 quote at the end of January would have been an all-time high as late as October 19, a little more than three months ago. And it's still up more than 23 per cent over the last 12 months.
Still, with strong demand and continued supply-side bottlenecks, higher price growth is a predictable outcome. The question is whether the original price impulses will subside before higher wage demands and wage growth set in motion a stickier inflation dynamic.
While the extent of interest rate hikes is uncertain, there is little doubt about the direction. With higher benchmark rates and a likely end to bond purchases, there is every reason to expect higher interest rates at both the short and the long end of the curve, although much is probably discounted. In Norway, another increase in the key policy rate is expected as early as March.
For bonds with a long maturity and a fixed coupon rate, this will be negative. For somewhat shorter floating-rate bonds, which characterise the Nordic market for corporate bonds and also most of our bond funds, this will mainly be positive.
Credit spreads are clearly more difficult to estimate. They rose in January, a typical risk-off sign. At present levels, spreads are not far below their 10-year median, but of course that's no guarantee they don't get higher
In the stock market, earnings – and earnings estimates for 2022 – have risen faster than stock prices. Unless earnings fail dramatically, there should be little reason to fear a significant decline. Still, rising interest rates will also weigh on the stock market.
However, this will be disproportionately tough for growth stocks, with much of their expected earnings further into the future. Over the past 15 years, such stocks have outperformed more fundamentally priced value stocks, driven by ever-lower interest rates. It is also the case that high-priced growth stocks have pulled many stock indices upwards, as even higher pricing has translated into even higher market values.
Shorter-term stock price movements confirm that growth shares are particularly sensitive to interest rates. With expectations of a somewhat higher interest rate level, then, there is reason to expect value stocks to do better. If the stock market declines for this reason, I strongly believe there is a good probability that many active managers – including Pareto Asset Management – will do better than their respective benchmark indices.
Finn Øystein Bergh
Chief Economist & Strategist
Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager’s skill, the fund’s risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments. This is marketing communication.